BUS 425 Tax & Estate Planning

Oral Will

(Death Bed Will), usually attorney must be present

Personal Exemption

(Doesn't exist anymore)

Charitable Gift of depreciated stock

(Look at PowerPoint) Give them the proceeds, not stock

Charitable Gift of appreciated stock

(Look at PowerPoint) Give them the stock, not proceeds

Section 1031 Technicalities

1. Time frame is 180 days 2. Say Grandma bought a beach house and paid $10,000 for it. 3. Now Grandma gives you the beach house (through her estate) and it is valued at $100,000. 4. If however, she gives it to you as a gift before she dies, the basis is now $10,000. Then, if you go to sell it, you have capital gains of $90,000. (But you have to pay a gain on the $90,000) 5. If instead, you do a 1031 exchange, sell your house for $90,000, buy a bigger beach house next door, and get the transaction done within 180 days, that $90,000 of gain is deferred into the beach house. 6. Then, say your kids want to do the same thing, that $90,000 just keeps on flowing

What are the different ways to title property and why does it matter for estate purposes?

1.) Tenancy by the Entirety Needs consent by both parties to allow this to go away, divorce 2.) Joint Tenancy with the Right to Survivorship Spouse must be a U.S. citizen 3.) Tenancy in Common Do not avoid probate, must have title changed 4.) Community Property: Property acquired during marriage (depends on state law) Sole Ownership

For most people who have to pay the AMT, what are the categories they usually fall into?

1.) They have a large amount of deductions, or state/local taxes, and property taxes 2.) Stock Options (A contract that gives the buyer the right to buy or sell an asset at a specified price prior to or on a specified date).

Q-TIP Trust

A Qualified Terminable Interest Property (Q-TIP) Trust is a trust that gives the individual establishing the trust the ability to direct income from the trust to his or her spouse over the spouse's life and then, at the spouse' death, to choose to whom the assets go. (Testamentary)

Living Will

A directive to a physician that allows you to state your wishes regarding medical treatment in the event of an illness or injury that renders you unable to make decisions regarding life support or other measures to extend your life.

Durable Powers of Attorney

A document that provides for someone to act on your behalf in the event that you become mentally incapacitated

Will

A legal document that describes how you want your property to be transferred to others after your death

What is a trust?

A legal entity in which some of your property is held for the benefit of another person. (A Living Trust is a trust created during your life): Reaching a certain age Finishing education To pay for education costs

Trusts before death

A legal entity that holds and manages an asset for another person. A trust is created when an individual, called a grantor, transfers property to a trustee, which can be individual, an investment firm, or a bank, for the benefit of one or more people, the beneficiaries. Virtually any asset—money, securities, life insurance policies, and property—can be put in a trust.

Letter of Last Instructions

A letter, generally to your surviving spouse, that provides information and directions with respect to the execution of the will. i. Non-Binding

Holographic Will

A signed but unwitnessed

Standard Family (A-B) Trust: Family Trust

A testamentary trust established to transfer assets to your children, while allowing the surviving spouse access to funds in the trust if necessary. Upon the death of the surviving spouse, the remaining funds in the trust are distributed to the children tax free.

Sprinkling Trust

A testamentary trust that distributes income according to need rather than some preset formula. The trustee is given discretion to determine who needs what among the designated beneficiaries and then "sprinkles" the income among them according to need.

Revocable Living Trust

A trust in which you control the assets in the trust and can receive income from the trust without removing assets from the estate. You can change it.

Irrevocable Living Trust

A trust in which you relinquish title and control of the assets when they are placed in the trust. You cannot change it.

Tenancy in Common

A type of ownership in which two or more individuals share ownership of assets. When one of the owners dies, that owner's share isn't passed on to the other owners. It becomes part of the deceased's estate and is distributed according to the deceased's will. (own up until death, who I want my beneficiaries for my part of the business to be)

Leveraged Recap

Adding significant debt to the company conditions were attractive for low-cost corporate borrowing while paying a large dividend with the proceeds of the loan. Obviously, he would then have to manage a highly leveraged company with an uncertain future. Besides, there was no way he could extract $80 million for himself; that would require some $250 million because he only owned 30% of the company We have the company take a loan for a large portion of the $90 million that they have to pay off with their current earnings, then he gets the money from the loan, works if the business does well for a while.

Tax Code: Section 179

Allows a taxpayer to elect to deduct the cost of certain types of property on their income taxes as an expense, rather than requiring the cost of property to be capitalized and depreciated. Capitalize/Depreciation --> Expense 1. Now, you can deduct up to $1,000,000 for equipment, software, and buildings 2. Encourages people to start up their own business

Section 6166

Allows estate taxes to be deferred if the interest in a closely held business exceeds 35% of the decedent's (person who has died) gross estate and the business qualifies as an active trade or business. 1. Important for people who have small businesses in their total estate or someone who is receiving a small business through someone else's estate. 2. This is an extension to pay estate taxes if the investment represents more than 35% of the gross estate. You can extend paying any estate taxes on that and actually they'll allow you to delay paying up to 4 years, then pay it off over the following 10 years. So it's up to 14 years to pay off the estate taxes. 3. It's a huge tax advantage; here's what they're trying to avoid: a. A small closely-held business is usually not going to be very liquid. It's not going to have a lot of assets. So they don't want for you to have to sell the business in order to pay the estate taxes. Use earnings over a period of time instead. b. 35% of the estate is a closely-held business

Section 1031

Allows you to avoid paying capital gains taxes when you sell an investment property and reinvest the proceeds from the sale within certain time limits in a property or properties of like kind and equal or greater value.

Codicil

An attachment to a will that alters or amends a portion of the will

Standard Family (A-B) Trust: Portable Estate Exemption

An exemption that allows a deceased spouse's unused estate tax exclusion to be shifted to the surviving spouse.

Pour-Over Will

Comes about when someone passes and assets that are included in the pour-over will pour into the trust (A house pouring over into a trust)

Living Trust

Create while I'm alive

Crummey Trust

Created by a pastor in 1968 who wanted to gift money to his minor child (living irrevocable) [but there cannot be restrictions] as a revocable gift. Therefore, you can put money into this revocable, living trust but have to notify the child and they can decide within 30 days whether or not you want to take it out. Parents cannot advise you. After 30 days, you cannot do anything with it until you are 25.

Testamentary Trust

Created by a will, put in motion by death; In process after death (Pour-over)

Q-Dot Trust

Created upon death and gives income and assets to a non-U.S. citizen spouse. (Testamentary)

Family Limited Partnerships

Defines who the beneficiaries are and are not.

Springing Power of Attorney

Doesn't do anything until something occurs (incapacitation)

What is the role of the executor?

Dual role of: a. Making sure that your wishes are carried out, and b. Managing your property until the estate is passed on to your heirs. i. Generally family members are the executors for smaller estates and banks/lawyers are the executors for larger estates.

Describe the unlimited marital deduction

For gift and estate tax purposes: there's no limit to the size of transfers between spouses that can be made on a tax-free basis.

Section 83(b)

Gives an employee or startup founder the option to pay taxes on the total fair market value of restricted stock at the time of granting. 1. Aka, it's a letter you send to the IRS letting them know you'd like to be taxed on your equity, such as shares of restricted stock, on the date the equity was granted to you rather than on the date the equity vests. a. Within 30 days of getting an option, you have to make an election (usually you will use the 83(b) if you think that the stock price is going to go up)

Gifts before death

Giving away an asset so that it no longer is yours and does not go through probate. Gifts avoid probate, reduce the taxable value of your estate, and allow you to help out your heirs while you're still alive. The recipient also doesn't pay taxes on the gift.

Stock-Secured Loan

He could pledge his company stock to a bank and borrow against it. He could borrow at least 50% of the value, maybe more, and still be left with his ownership position. Of course, he would have to personally sign all the loans and he wasn't sure he could stand the pressure

Stock Sale

He could sell his stock into the market during periods when insiders could trade. While he would maintain his control, at least until some predator appeared, this would subject him to market risk and he would always have to worry about an SEC investigation into "insider info."

Paul's Problem: His money is tied up in the business ($90 Million) -->

He needs to get the $1 Million a year, not necessarily going to come straight out of the checking account

What is the Alternative Minimum Tax?

If you didn't pay enough in regular tax, you're going to have to pay a little more

How did the 2017 Tax Act affect deductions?

Increased the standard deduction to $12,000 for single filers and $24,000 for joint filers. This allowed many individuals to avoid itemizing their deductions (An expenditure on qualifying things that can be subtracted from the Annual Gross Income to reduce your tax bill)

Why would you want to avoid Probate?

It really ties up the time and money of your heirs.

How to avoid Probate?

Joint Ownership JTWROS [contracts that list beneficiaries 401(k)] Tenancy by the Entirety Tenancy in Common Gifts before Death Trusts before Death

How does basis change between gifting and passing through an estate?

Less taxes on capital gains by passing through the estate

4) Review the strategies for realizing liquidity: Which one sounds the most reasonable? (Page 306)

Leveraged Recap Stock-Secured Loan Stock Sale 10b5-1 or Corporate Executive Blind Trust Prepaid Forward Sale

What are the fundamental differences between a living and a testamentary trust?

Living Trust: A trust created during your life Testamentary Trust: A trust created by your will, which becomes active after your die

Dynasty Trust

Living or testamentary trusts the incorporate many family members. Can live as long as the oldest living relative plus another 21 years.

Tenancy by the Entirety

Married A type of ownership limited to married couples. Property held this way can be transferred only if both the husband and the wife agree. In addition, upon the death of one, the property automatically passes directly to the survivor. (goes to spouse who must be U.S. citizen)

Section 2032A

Provides that if certain conditions are met, the executor may elect to value qualified real property on the basis of such property's value at its current use as a farm, rather than at its fair market value based on its highest and best use. 1. Some people are going to receive family farms, so you can come up with a valuation for the land, then reduce down the amount claimed for the value of the farm

Capital Gains =

Sales Price - Grant Price

When you make an 83(b) election, if I make the election within 30 days past the grant date, I will have to make the election and pay ordinary income tax on the grant amount.

So if I have 1,000 shares, I will have to pay tax on $1,000. When that stock vests and becomes all mine a year later, I don't have to do anything because I made the election. Then, the next day when I sell it, I am going to have capital gains (which is lower taxes than normal income rates)

Contingent/Conditional Will

Someone can receive assets/property/investments upon completing some task (usually reaching a certain age/graduating college)

What has significantly changed from the 2017 Tax Act?

State and Local Income (or sales) and property tax deductions limited Mortgage interest deduction reduced Medical and dental expense deduction expanded Miscellaneous itemized deductions eliminated Deductions related to hobby income eliminated Personal casualty losses limited Pease limitation repealed (The reduction for overall itemized deductions for higher-income taxpayers is eliminated)

What's the difference between tax avoidance and tax evasion?

Tax Avoidance is Legally exploiting the tax system to reduce current or future tax liabilities by means not intended by parliament. It often involves artificial transactions that are contrived to produce a tax advantage. Tax Evasion is To escape paying taxes illegally. This is usually when a person misrepresents or conceals the true state of their affairs to tax authorities.

Couples (Mutual) Will

Testamentary writing that may be executed by a married couple to ensure that their property is disposed of identically.

HIPAA Release

The Health Insurance Portability and Accountability Act prevents your healthcare provider from releasing your medical information to anyone not directly involved in your medical care.

Who governs the distribution of property if there is no will... Federal or State Government?

The State Government governs the distribution of property if there is no will Every state is different i. For the Paddock case in the state of Nevada, it said to give his entire estate to his mother ii. Mother didn't want it iii. Wanted to roll money out to the victims If you die without a will, it is called intestate

What are the three characteristics of a valid will?

The Validation of a will is the first step in the probate process. Probate is the legal process of distributing an estate's assets. Once the court is satisfied that the will is valid, the process of distributing the assets begins. Furthermore, about one in three wills is challenged, so it's important that you understand the requirements for a valid will. 1.) Mentally competent when the will is written 2.) You cannot be under undue influence of another person (threatened or forced to sign) 3.) The will must conform to the laws of the state

Advantages to Irrevocable Trusts

The assets in the trust avoid probate upon your death Any price appreciation on an asset in the trust is not considered part of your estate, and no estate taxes are imposed on it when you die Income earned on assets in the trust can be directed to the beneficiary, which can result in tax savings if the beneficiary is in a lower tax bracket.

Advantages to Revocable Trusts

The assets in the trust avoid probate upon your death You maintain the power to alter or cancel the trust If you become incompetent, your assets will continue to be professionally managed by the trustee You can replace the trustee if you do not have confidence in his or her skills

Standard Deduction

The increase of the standard deduction is helpful for people who have themselves (big boost), one child (big boost), and after that, there are diminishing returns

What is Probate?

The legal procedure that establishes the validity of a will and then distributes the estate's assets. Everything that goes through probate is public record.

Is there a lifetime maximum?

The lifetime maximum is $11.4 Million

Mirror Will

The survivor can change the will at any time

Joint Will

The survivor cannot change the will in the future (Do not want this)

Disadvantages to Revocable Trusts

There are no tax advantages—you pay taxes on any income from and capital gains on the assets in the trust The assets in the revocable living trust are considered part of your estate for estate tax purposes. The assets in the revocable living trust cannot be used as collateral for a loan

10b5-1

This process would address the SEC issue, and also could put in motion a regular sales plan that he could influence. He could always get out of it, but both the market sales and the sales plan would sacrifice the control premium, take years, and be subject to market pressures. It is a slow burn of stock.

Prepaid Forward Sale

This rather unusual transaction involves a current payment to the shareholder in exchange for a commitment to sell his stock for future delivery at a specific price. This would allow him to maintain control, defer taxes, and realize current value. Unfortunately, the IRS was critical of this method, but it still seemed to work.

Simple Will

Uncomplicated estate, name a few people for a few items, the rest is shared among the heirs

Joint Ownership

When assets are owned jointly, they're transferred to the surviving owner(s) without going through probate. In effect, the surviving owner(s) immediately assumes his or her ownership share of the property.

What documents are needed for Estate Planning?

Will Codicil Letter of Last Instructions Durable Powers of Attorney Living Will Medical Powers of Attorney / Durable Healthcare Power of Attorney Limited Powers of Attorney Springing Power of Attorney HIPAA Release Trust Pour-Over Will Simple Will Contingent/Conditional Will Couples (Mutual) Will i. Mirror Will ii. Joint Will iii. Holographic Will iv. Oral Will

Disadvantages to Irrevocable Trusts

You no longer maintain control over the assets in the trust. The assets in the trust cannot be used as collateral for a loan. It may be more expensive to set up than the probate costs you are trying to avoid. Setting up the trust can involve a lot of paperwork.

Medical Powers of Attorney / Durable Health-Care Power of Attorney

a. A document that designates someone to make life support decisions for you if you lose capacity to decide. i. If we have a Living Will (and define exactly what you want to happen to you during a medical procedure) but you have Medical Powers of Attorney (that gives someone to rights to decide on your behalf), this overrides the Living Will

What is a gift?

a. A gift is a method of transferring wealth before you die. Gifts reduce the taxable value of your estate and allow you to help out your heirs while you're still alive- and the recipient of the gift isn't taxed.

Trust

a. A legal entity in which some of your property is held for benefit of another person. (Look at uses on page 326)

What is the generation-skipping transfer tax?

a. An additional tax imposed on gifts and bequests that skip a generation (gifts or bequests that pass assets from a grandparent to a grandchild). The purpose is to wring potentially lost tax dollars from the intervening generation. In effect, the assets are taxed as if they moved from the grandparents to their own children and then from their children to their grandchildren. b. A tax on wealth and property transfers to a person or more generations younger than the donor i. Don't go over gift limit

How much can I give to any one person?

a. As of 2018, you're permitted to give $15,000 per year tax free to as many different people as you like. You can give unlimited gifts for educational/medical purposes, also charity 501-C3 i. Can't give a contra-gift (I may need this back in the future) ii. Also cannot give money away so it can be used for myself à No strings attached iii. Gift/Real Estate has the cost basis from the person you got it from

What exclusions apply to the unlimited marital deduction?

a. Does not apply to spouses who aren't U.S. citizens. The logic behind this law is to prevent non-U.S. spouses from returning to their home countries with an untaxed estate. Once they left the United States, Uncle Sam would never get any more tax dollars from the estate, and the IRS isn't about to let that happen. b. If you both have estates of similar size and both have taxable implications, moving one over into someone else's name creates a big tax headache. It's good if it is below the limit, it is bad if you just transfer it over and create a bigger problem for the heirs. Should not exceed $11.4 million

3) What three areas was Mr. Schroder focused on?

a. Emily (cerebral palsy) b. Maximize his annual gifting to his family i. Move his assets from his estate à maximize those c. Legacy (of accomplishment) i. Education for future generations, have things named after you

Why are basis and a step-up in basis important?

a. If it is basis through gifting (gifter still alive), that value that you receive it at, is the value the asset was valued at on the date of purchase. You can then sell it for a gain i. You step into the shoes. If the beach house was purchased for $100,000, you get that value and can sell it for more if the value goes up. b. A step-up basis is if you receive part of the estate after the owner's death, then its value is whatever it is at the time of the person's death or 6 months later (The executor chooses the fair-market value at the date of death or 6 months later) GENERALLY THE BETTER OPTION à less to pay on capital gains i. If they paid $100,000 for the beach house, but it is worth $500,000 at the time of death, your value is then $500,000. ii. Important for stocks, have to be capital gains on these options iii. Large appreciated assets are better to pass along through an estate because of the $15,000 gifting limit per year.

5.) Review Exhibit 1: Are these values reasonable? What could alter this plan?

a. Something seems fishy b. If you total up all of his assets from the beginning of the case that is $122 Million c. This won't quite work à He can keep working, try to build up the value of the business, slowly funds things like the family center or the foundation. But he also has to take care of his personal needs and his family needs before he gets on to the legacy. Part of the legacy is to take the money out of the estate i. If he were to die with a $122 million estate, that would be a very very large bill to be paid.

2) Why is it considered optimal to make all of your charitable contributions during your lifetime (versus after you die)?

a. Tax deductions if it goes to an entity b. See the evidence of your charitable actions i. Legacy à Name on a building c. Moves money out of your estate (tax deductions)

1) In the Schroder case, there is a quote, "To grow wealth you concentrate, to protect wealth you diversify". What does this mean?

a. When you start a business, you have to concentrate everything and keep it together; invest in the business, growing the business à Money comes in, you make a little bit of a salary and grow the business b. Then, as he ages up, he needs to diversify, aka have different pools of money. These are pools of money you are allocating towards different resources i. In my own life, this might be all the money from the different retirement accounts I have from all the jobs I have worked à Group some of them, roll some over, or keep separate

Huge Implications with Section 2032A

a. You have to continue using that land in whatever way you're currently using it for 10 years; commit to that b. When you sell it, if you valued it at a low level and you sell it, then the capital gains becomes even larger. i. Are you going to be able to keep it for 10 years and are you planning on selling it? à Because it might be better to take the money out of the estate tax than out of your own pocket on capital gains later on

Joint Ownership with the Right to Survivorship (JTWROS)

i. When assets are owned jointly, they're transferred to the surviving owner(s) without going through probate. In effect, the surviving owner(s) immediately assumes his or her ownership share of the property.

What are some reasons people don't have wills?

i. When you think about making a will, you think about dying. 1. If you have children, you must either have a will or guardianship papers

Limited Powers of Attorney

i. You are getting ready to buy a house, job sends you out of town on your closing date, then you get one of these and name someone to sign on your behalf 1.) Legally binding à Their name/your name

What are some advantages for having a will?

i. You know where assets are going 1. The bigger the estate, the more fighting among heirs ii. You can set up your estate planning tools 1. Trusts, ways to title property to determine where it's going

What is the cost of probate?

ii. Gifts: You can give away $15,000 per year (2018) tax free to as many people as you want iv. Probates generally cost 3-8% of the entire estate's value

Examples of Tax Evasion

o A Dishonest Tax Reporting

Examples of Tax Avoidance

o Tax Deductions o Changing One's Business Structure through incorporation o Establishing an offshore company in a tax haven o Putting large turnover ratios into retirement accounts (tax deferred) o Buying a house § If you have mortgage, you get to write off the interest § If you have to pay property taxes, you have to put that on your tax return § When you sell that asset when it makes a ton of money (there's a certain amount up to $500,000) that you can exclude from gain o Charitable Contributions o Contributing to a retirement account from your employer § You make $100,000 and put in maximum of $19,000, your EOY W-2 will have $81,000 on it (taxable income)

Life Estate

the ownership of land for the duration of a person's life. In legal terms, it is an estate in real property that ends at death when ownership of the property may revert to the original owner, or it may pass to another person.

For a No 83(b) election,

you don't do anything for the election. When it vests, I have to pay $5 on the $1,000 investment --> So now $5,000 is taxable at ordinary income rates. Therefore, your capital gain is $10, which is the $15-$5. The 83(b) pays less taxes (Capital gains taxes is in a much lower tax bracket than income tax), but if the capital gains stock goes down, then you lose.

Common Tax Filing Mistakes

· Choosing the wrong filing status o Choose whatever you are the last day of the year · Failing to include or using the incorrect social security numbers · Failing to use the correct forms and schedules · Failing to sign and date the return · Claiming ineligible dependents · Failing to pay and report domestic payroll taxes · Failing to report income because it was not included on a Form W-2, Form 1099, or other information return o 1099 for Independent contractors (20% bump up increase) · Treating employees as independent contractors · Failing to file a return when due a refund · Failing to check liability for the alternative minimum tax

How do you make yourself aware of changes for tax planning purposes?

· IRS website · Deloitte Essential Tax and Wealth Planning Guide o Look at Installments o Tax Rate Changes

Additional roles of executors:

· Personal matters: sending copies of the will to all the beneficiaries and publishing death notices · Paying necessary taxes, paying off the debts of the estate, managing the financial matters of the estate, distributing the assets remaining after bequests have been honored as specified in the will, and reporting final accounting of the distribution to the court.

Mr. Schroder also had needs and dreams for his own self.

· Provide for own self ($1 Million per year) · Needs someone to support his children · Philanthropic legacy

What are the four steps in Estate Planning Process?

· Step 1: Determine the value of your estate o Done the least correctly · Step 2: Choose your heirs and decide what they will receive · Step 3: Determine the cash needs of your estate · Step 4: Select and implement your estate planning techniques o Hardest to implement

***Class Notes - Estate Planning (Reason to Make an Estate Plan)

· Your son Frankie, o Still living at home at age 35 o Comes home at 4 am and sleeps until noon o Pays no rent, has his mother launder his clothes, and heartily participates in all family meals o Works part-time at the local video games store o Begins every sentence with the word "Dude" § Are you sure you want to leave everything to him... no strings attached?